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The Risk Adverse Interactive Entertainment Industry of 2004 April 5, 2004 In the past month, DFC Intelligence has released three reports carefully analyzing the past, present and future of the video game and interactive entertainment industry. The overriding theme of these reports has been that worldwide demand for interactive entertainment has been growing at a rapid pace. However, at the same time, the cost of development and marketing often appears to be rising at an even greater rate. The cost of publishing is so high that there is a real hesitance about taking any kind of creative risk. Currently, the market is at the point in the current game cycle when publishers are extremely reluctant to release new, original intellectual property (IP). The market today is all about licensing and sequels. In our latest Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry report we forecast worldwide game industry hardware and software revenue to grow from $23.2 billion in 2003 to $33.4 billion in 2008. This figure does not even include the large market for game rentals, used games, accessories, books and magazines and a significant portion of the online game market. However, beneath the glossy press release numbers there are some pressing short term concerns for the interactive entertainment industry. Our latest report forecasts that overall industry revenue will be down 9% in 2004, falling another 14% in 2005.
As mentioned, the current 128-bit systems have reached the point in their cycle when the market is saturated with software and publishers are afraid to release “untested” products. In the report The Impact of Licensing in Interactive Entertainment, we note that almost all the top titles of 2003 were either based on a license or a sequel to an established product. True Crime: Streets of LA and The Getaway were the only two cases of an original new video game IP making it into the list of top selling 2003 games. No other original IP was even close to the Top 20. It is interesting to note that both of these games are part of the crime genre/Grand Theft Auto "inspired" games that currently resonate with consumers. Taking a further look at sales numbers, one can see why publishers may hesitate to release untested brands into the current market. For example, take a look at two titles released in late 2003, Prince of Persia: The Sands of Time (November) and Dragonball Z: Budokai II (December) to examine the concept of “brand” vs. “game quality.” Prince of Persia came out of E3 as the “Game of the Year” by many gaming publications. On gameranking.com (a site that aggregates game reviews from multiple publications), Prince of Persia achieved a 93%. A rating only eclipsed by best sellers Zelda and GTA:Auto Pack for Xbox. Prince of Persia was originally a PC game released approximately ten years ago, however, most casual gamers have not heard of Prince of Persia and therefore, it operates more like an original IP than a video game franchise. Thus, Ubisoft, the publisher for Prince of Persia, spent significant advertising dollars for the game to generate awareness for the game. The television advertising largely emphasized the feature set of the game rather than the brand. Given the quality of the game and marketing spend, it would be natural to think that the sales would be similar to a Zelda. However, the U.S. sales are “only” 330K units on the PS2 through January 2004. The sales are solid, but if the quality of the game and features are the driving factor for mass market consumers the sales would be greater. In contrast, Dragonball Z: Budokai II ratings were mediocre with a gameranking.com score of only 68%. However, the recognition of the brand based on the cartoon series, trading card game and previous video games is amazingly strong. The sales of Dragonball Z: Budokai II were more than double Persia at 720,000 units for the PS2. In this case of Persia vs. Dragonball Z, clearly the recognition of the entertainment brand drives sales more than game quality. The market situation becomes even more challenging with the realization that most of the established brands are already owned by the major players. The big concern for publishers in today’s market is how to compete with the goliath that is Electronic Arts. No longer, just the leader in sports games, EA now seems to dominate every category, even movie-based licensing. However, even industry giant EA is not immune from general market conditions. To use an analogy from one of the few big-name licenses it does not yet have a piece of, Electronic Arts has become like Jabba the Hut, constantly needing to feed itself in order to support a $16 billion market valuation. This has lead EA down a potentially dangerous path when it comes to movie licensed games. For holiday 2003, sales of the new Harry Potter licensed game from EA, Harry Potter: Quidditch World Cup were way down from previous versions. This may have been because no new Harry Potter movie was released last fall. Nevertheless, Harry Potter remains one of the top game licenses. What is more concerning is EA’s venture into the realm of more risky one-off movie licenses like Looney Tunes: Back in Action and Catwoman. These types of licenses are always risky and it is hard to imagine the EA of several years ago going anywhere near them. With current market conditions it is now essential for developers and publishers to start planning for new game systems. Our latest market forecast report and our new report The Business of Computer and Video Games, look closely at future console and portable game systems. Because many details about some of these systems are unknown, including price, launch date, name, technical specifications and so on, forecasting becomes challenging. This year DFC Intelligence will be releasing its market forecasts in several installments throughout the year. Each installment will provide a unique scenario with different forecasts for release date, price and market acceptance. Our most recent report contains our most conservative forecasts, with the assumption that new game systems will be released in 2006 (except for the Sony PSP which is scheduled for early 2005). Future forecasts will look at such scenarios as Microsoft releasing a game system before anyone else. It will most likely be the game systems of the future that will see the next big new video game franchises. This is where developers and publishers will once again start to take risks on unproven franchises. In the meantime, the 128-bit market can look for more of the tried and true. In other words, 2004 and 2005 are likely to be dominated by familiar names and games with roman numerals at the end.
As part of our ongoing research efforts DFC Intelligence is delivering free monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of reports on the video game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe/PAL, U.S., rest of world)) through 2009. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as new portable game systems. The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends. Market Leaders in the Video Game and Interactive Entertainment Industry This 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. The Online Game Market This 475 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.
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